Edgar Filing: RESPIRONICS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2007

¨	Transition Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 000-16723

RESPIRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

25-1304989

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1010 Murry Ridge Lane

Murrysville, Pennsylvania

15668-8525

(Address of principal executive offices)

(Zip Code)

724-387-5200

(Registrant’s Telephone Number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 30, 2007, there were 80,629,821 shares of Common Stock of the registrant outstanding, of which 6,990,305 were held in treasury.

INDEX

RESPIRONICS, INC.


PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Review Report of Independent Registered Public Accounting Firm	3

	Consolidated balance sheets — March 31, 2007 and June 30, 2006	4

	Consolidated statements of operations — Three-month and nine-month periods ended March 31, 2007 and 2006	5

	Condensed consolidated statements of cash flows —Nine-month periods ended March 31, 2007 and 2006	6

	Notes to consolidated financial statements — March 31, 2007	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19

Item 4.	Controls and Procedures	20

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

SIGNATURES		21

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Review Report of Independent Registered Public Accounting Firm

Board of Directors

Respironics, Inc. and Subsidiaries

We have reviewed the accompanying consolidated balance sheet of Respironics, Inc. and Subsidiaries as of March 31, 2007, and the related consolidated statements of operations for the three-month and nine-month periods ended March 31, 2007 and 2006, and the condensed consolidated statements of cash flows for the nine-month periods ended March 31, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the auditing standards of the Public Company Accounting Oversight Board, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Respironics, Inc. and Subsidiaries as of June 30, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated September 8, 2006 we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph for the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, effective July 1, 2005. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

May 10, 2007

CONSOLIDATED BALANCE SHEETS

RESPIRONICS, INC. AND SUBSIDIARIES


	(Unaudited) March 31 2007			June 30 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	270,026,374		$	259,513,275
Short-term investments		48,643,695			5,838,020
Trade accounts receivable		205,924,273			187,501,600
Inventories		163,087,195			124,149,106
Prepaid expenses and other current assets		24,892,651			19,196,541
Deferred income tax benefits		48,903,324			45,893,406

TOTAL CURRENT ASSETS		761,477,512			642,091,948
PROPERTY, PLANT AND EQUIPMENT
Land		4,471,762			4,371,831
Buildings		28,884,412			27,420,536
Production and office equipment		348,819,266			313,884,506
Leasehold improvements		14,831,698			10,982,910

		397,007,138			356,659,783
Less allowances for depreciation and amortization		246,464,052			218,717,264

		150,543,086			137,942,519
OTHER ASSETS		64,800,021			55,981,290
GOODWILL		190,286,277			181,361,861

TOTAL ASSETS	$	1,167,106,896		$	1,017,377,618


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	83,166,572		$	70,667,025
Accrued expenses and other current liabilities		126,635,307			122,173,359
Current portion of long-term obligations		19,959,360			18,201,496

TOTAL CURRENT LIABILITIES		229,761,239			211,041,880
LONG-TERM OBLIGATIONS		26,890,728			26,755,813
OTHER NON-CURRENT LIABILITIES		22,140,670			15,131,953
SHAREHOLDERS’ EQUITY
Common Stock, $.01 par value; authorized 100,000,000 shares; issued 80,625,782 shares at March 31, 2007 and 79,730,591 shares at June 30, 2006; outstanding 73,635,477 shares at March 31, 2007 and 72,740,276 shares at June 30, 2006		806,218			797,306
Additional capital		348,644,615			315,857,213
Accumulated other comprehensive income (loss)		282,783			(5,068,361	)
Retained earnings		580,019,952			494,301,163
Treasury stock		(41,439,309	)		(41,439,349	)

TOTAL SHAREHOLDERS’ EQUITY		888,314,259			764,447,972

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,167,106,896		$	1,017,377,618

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

RESPIRONICS, INC. AND SUBSIDIARIES


	Three-month periods ended March 31						Nine-month periods ended March 31
	2007			2006			2007			2006
Net sales	$	307,389,896		$	267,311,633		$	862,677,316		$	765,435,362
Cost of goods sold		142,961,893			120,598,536			401,745,431			343,310,822

		164,428,003			146,713,097			460,931,885			422,124,540
General and administrative expenses (excluding acquisition earn-out expenses)		43,761,620			37,413,924			117,071,681			117,221,726
Acquisition earn-out expenses		—			665,193			—			2,717,722
Sales, marketing and commission expenses		58,729,219			50,725,674			171,158,243			151,918,671
Research and development expenses		16,792,630			14,106,931			47,044,891			41,138,760
Contribution to foundation		2,500,000			—			2,500,000			1,500,000
Restructuring and acquisition-related expenses		977,426			406,741			3,864,336			1,719,907
Other income		(3,104,325	)		(1,192,908	)		(7,944,256	)		(7,206,812	)

		119,656,570			102,125,555			333,694,895			309,009,974

INCOME BEFORE INCOME TAXES		44,771,433			44,587,542			127,236,990			113,114,566
Income taxes		10,720,750			16,725,139			41,518,201			42,622,974

NET INCOME	$	34,050,683		$	27,862,403		$	85,718,789		$	70,491,592

Basic earnings per share	$	0.46		$	0.38		$	1.17		$	0.98

Basic shares outstanding		73,417,063			72,541,140			73,092,046			72,190,012
Diluted earnings per share	$	0.46		$	0.38		$	1.16		$	0.96

Diluted shares outstanding		74,302,114			73,704,576			73,960,109			73,536,761

See notes to consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

RESPIRONICS, INC. AND SUBSIDIARIES


	Nine-month periods ended March 31
	2007			2006
OPERATING ACTIVITIES
Net income	$	85,718,789		$	70,491,592
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		45,805,757			39,781,399
Stock-based compensation		9,268,613			8,970,977
Excess tax benefits from share-based payment arrangements		(5,463,911	)		(6,225,289	)
Acquisition earn-out payments, net of provisions		(5,365,055	)		(1,566,121	)
Gain on sale of investment		(928,078	)		(4,398,274	)
Changes in operating assets and liabilities:
Accounts receivable		(17,382,056	)		(26,625,056	)
Inventories		(40,371,603	)		(21,006,191	)
Other operating assets and liabilities		24,298,829			511,476

NET CASH PROVIDED BY OPERATING ACTIVITIES		95,581,285			59,934,513
INVESTING ACTIVITIES
Proceeds from sale of investment		928,078			5,488,097
Purchases of property, plant and equipment		(50,937,433	)		(37,179,849	)
Purchases of short-term investments		(59,167,749	)		—
Sales of short-term investments		15,434,279			—
Maturities of short-term investments		1,200,000			—
Acquisition of businesses, including additional purchase price payments, intangible assets and other investments, net of cash acquired		(19,827,093	)		(21,621,069	)

NET CASH USED BY INVESTING ACTIVITIES		(112,369,918	)		(53,312,821	)
FINANCING ACTIVITIES
Excess tax benefits from share-based payment arrangements		5,463,911			6,225,289
Proceeds from guarantee of third party debt		1,592,188			—
Net increase in borrowings		2,181,803			565,648
Issuance of common stock		18,063,830			17,151,934

NET CASH PROVIDED BY FINANCING ACTIVITIES		27,301,732			23,942,871

INCREASE IN CASH AND CASH EQUIVALENTS		10,513,099			30,564,563
Cash and cash equivalents at beginning of period		259,513,275			234,632,280

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	270,026,374		$	265,196,843

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

RESPIRONICS, INC. AND SUBSIDIARIES

March 31, 2007

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of Respironics, Inc. and subsidiaries (the “Company” or “Respironics”) have been included. Operating results for three-month and nine-month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended June 30, 2007. The amounts and information as of June 30, 2006 set forth in the Consolidated Balance Sheet and notes to the consolidated financial statements that follow were derived from the Company’s Annual Report on Form 10-K for the year ended June 30, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

Certain amounts in the prior year financial statements were reclassified to conform with the presentation in the current period.

NOTE B – SHORT-TERM INVESTMENTS

Short-term investments consist of U.S. Treasury bills, other government securities, commercial paper, and certificates of deposit, with maturities greater than 90 days.

NOTE C – ACCOUNTS RECEIVABLE

Trade accounts receivable in the Consolidated Balance Sheets is net of allowances for doubtful accounts of $15,309,000 as of March 31, 2007 and $15,188,000 as of June 30, 2006. From time-to-time, the Company does write-off uncollectible customer accounts that are included in the allowance for doubtful accounts, resulting in a direct reduction to the allowance for doubtful accounts.

NOTE D – INVENTORIES

The composition of inventories is as follows:


	March 31, 2007		June 30, 2006
Raw materials	$	48,648,000	$	41,059,000
Work-in-process		11,451,000		9,606,000
Finished goods		102,988,000		73,484,000

	$	163,087,000	$	124,149,000

NOTE E – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company’s reporting currency is the U.S. Dollar, and a substantial majority of the Company’s sales, expenses, and cash flows are transacted in U.S. Dollars. The Company also does business in various foreign currencies, primarily the Japanese Yen, the Euro, the British Pound, the Hong Kong Dollar, the Canadian Dollar, the Swiss Franc, the Swedish Kronor, the Norwegian Kroner, the Australian Dollar and the Chinese Yuan. As part of the Company’s risk management strategy, management has put in place a hedging program under which the Company enters into foreign currency option and forward contracts to hedge a portion of cash flows denominated in certain foreign currencies.

The Company enters into foreign currency contracts, when it deems appropriate, to reduce the risk that the Company’s earnings and cash flows, resulting from certain forecasted and recognized currency transactions, will be affected by changes in foreign currency exchange rates. However, the Company may be impacted by changes in foreign exchange rates related to forecasted transactions that are not hedged. The success of the hedging program depends, in part, on forecasts of the Company’s transactions in foreign currencies. When deemed appropriate, hedges are placed for periods consistent with identified exposures, but not longer than the end of the year for which the Company has substantially completed its annual business plan.

As of March 31, 2007, the composition and nature of the Company’s derivative instruments and hedging activities have not changed materially since June 30, 2006. Neither the Company’s derivative instruments nor fluctuations in foreign currency rates had a material impact to the Company’s consolidated financial statements as of, or during the three-month and nine-month periods ended March 31, 2007.

NOTE F – COMMITMENTS AND CONTINGENCIES

Litigation and Other:

On March 5, 2004, the Company filed a lawsuit against Invacare Corporation (Invacare) in the United States District Court for the Western District of Pennsylvania alleging that Invacare’s manufacture, sale and marketing of a new Continuous Positive Airway Pressure (CPAP) device infringes one or more of eleven U.S. patents of the Company. In its complaint, the Company has sought preliminary and permanent injunctive relief, damages and an award of three times actual damages. In its answer to the complaint, Invacare has denied the infringement allegations of the complaint and has asserted that the Company’s patents are invalid.

Discovery has concluded, and by Order dated August 30, 2006, the Court decided certain issues regarding the interpretation of patent claims involved in the case. On April 26, 2007, the Court issued a summary judgment decision in which it (1) held the Respironics patent claims asserted to be valid; (2) held that Invacare’s current CPAP with SoftX product does not infringe three Respironics patents; and (3) held that it could not decide on summary judgment whether a prior version of the Invacare CPAP with SoftX product infringed a fourth Respironics patent. No trial date has been set for the infringement determination concerning the prior CPAP with SoftX product. Meanwhile, Respironics intends to seek an appeal of the non-infringement aspects of the Court’s decision.

On August 6, 2004, Invacare filed a lawsuit against the Company in the United States District Court in the Northern District of Ohio alleging that the Company has engaged in monopolization, restraint of trade and unfair competition in the sale and distribution of sleep apnea products. The lawsuit’s claims include allegations that the Company’s actions and alleged market power have foreclosed competitors from alleged markets and have created markets where there has not been competitive pricing or availability of competitive product offerings. In the lawsuit, Invacare seeks damages in an unspecified amount and to treble such damages pursuant to the antitrust laws, as well as attorney’s fees and punitive damages. Invacare also seeks injunctive relief as to certain marketing practices.

By Order dated October 23, 2006, the Court granted partial summary judgment in the Company’s favor, dismissing Invacare’s monopolization, attempted monopolization, price discrimination, and unfair competition claims. The Court also limited future discovery in the case to the two remaining claims, a restraint of trade claim under both federal and state law. The Company continues to vigorously defend itself against these claims. On October 31, 2006, Invacare filed a motion asking the Court to reconsider portions of its decision granting partial summary judgment. The Company opposes this motion.

The Company is, as a normal part of its business operations, a party to other legal proceedings in addition to those described above. Legal counsel has been retained for each proceeding, and none of these proceedings is expected to have a material adverse impact on the Company’s results of operations or financial condition.

Contingent Obligations Under Recourse Provisions:

In connection with customer leasing programs, the Company uses independent leasing companies for the purpose of providing financing to certain customers for the purchase of the Company’s products. In some cases, the Company is contingently liable, in the event of a customer default, to the leasing companies within certain limits for unpaid installment receivables initiated by or transferred to the leasing companies. The transfer of certain of these installment receivables meets the criteria of Financial Accounting Standards Board (FASB) Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” (FASB No. 140) and therefore is not recorded on the Company’s financial statements.

As of March 31, 2007, the total exposure for unpaid installment receivables approximates $13,196,000, compared to $15,718,000 as of June 30, 2006. Included in these amounts are unpaid installment receivables totaling $12,448,000 and $14,970,000 that meet the FASB No. 140 criteria and are not recorded on the Company’s financial statements at March 31, 2007 and June 30, 2006, respectively. The estimated fair value of the Company’s contingent recourse guarantee is $2,901,000 and $3,406,000 as of March 31, 2007 and June 30, 2006, respectively. Approximately 10% and 11% of the Company’s net sales were made under these financing arrangements during the three-month and nine-month periods ended March 31, 2007, compared to 9% during the three-month and nine-month periods ended March 31, 2006. A portion of these sales was made with recourse. The Company is not dependent on these off-balance sheet arrangements.

Third Party Debt Guarantee:

The Company has guaranteed the payment of certain third-party bank debt. The maximum potential amount of future payments that the Company could be required to make, in the event that the third party defaults on its debt obligations, is $7,000,000. The term of the guarantee is five years from its December 2006 inception date. The current fair value of the guarantee approximates $1,563,000; this amount is included in the consolidated balance sheet within other non-current liabilities and will be amortized into income over five years. At the present time, the Company does not believe it is probable that the third party will default on the amount subject to the guarantee.

Product Warranties:

Estimated future warranty costs related to certain products are charged to operations in the period in which the related revenue is recognized.

Generally, the Company’s standard product warranties are for a one- to three-year period (based on the specific product sold and country in which the Company does business) that covers both parts and labor. The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s product warranty liability reflects management’s best estimate of probable liability under its product warranties. Management estimates the liability based on the Company’s stated warranty policies, which project the estimated warranty obligation on a product-by-product basis based on the historical frequency of claims, the cost to replace or repair its products under warranty, and the number of products under warranty based on the warranty terms and historical units shipped. The warranty liability also includes estimated warranty costs that may arise from specific product issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company also engages in the sale of extended warranties and long-term service contracts for which revenue is deferred and recognized over the warranty terms, which are generally between two and five years. Changes in the liability for product warranty and deferred service revenues associated with these service programs for the nine-month period ended March 31, 2007 are as follows:


Product Warranties
Balance at June 30, 2006	$	18,600,000
Warranty accruals during the period		14,740,000
Service costs incurred during the period		(11,285,000	)

Balance at March 31, 2007	$	22,055,000

Deferred Service Revenues
Balance as of June 30, 2006	$	8,238,000
Revenues deferred during the period		3,606,000
Amounts recorded as revenue during the period		(3,247,000	)

Balance at March 31, 2007	$	8,597,000

Product warranty amounts included in the table above include amounts associated with a product recall of a heated humidifier device used with the Company’s older legacy CPAP systems. During the three-month period ended December 31, 2006, the Company completed substantially all of its initial customer communications in the field and began to administer the recall. The Company also maintained contact with the U.S. Food and Drug Administration (FDA) regarding the recall. In total, the Company has identified approximately 172,000 humidifiers, produced three to five years ago, that are subject to this recall. As of March 31, 2007, the Company maintained an accrual in the amount of $2,820,000 based on its estimate of remaining costs to administer and service the recall. All activity within the recall accrual for the nine-month period ended March 31, 2007 is reflected in the table above. The estimates and related accruals are all subject to FDA approval of the Company’s plan of action with respect to the recall.

The accruals for product warranties and deferred service revenues are classified with accrued expenses and other current liabilities in the consolidated balance sheets.

NOTE G – STOCK OPTION AND PURCHASE PLANS

At March 31, 2007, the Company has two active employee stock option plans, the 2000 Stock Incentive Plan and the 2006 Stock Incentive Plan, and one employee stock purchase plan. The 2000 Stock Incentive Plan and the 2006 Stock Incentive Plan are described more fully in Note N in the Company’s June 30, 2006 consolidated financial statements.

The Respironics, Inc. 2007 Employee Stock Purchase Plan (“2007 Plan”) was approved by the Company’s shareholders on November 14, 2006. Respironics employees began participating in this Plan effective January 1, 2007. The 2002 Employee Stock Purchase Plan expired on December 31, 2006. The 2007 Plan, which expires by December 31, 2016, provides for the issuance of up to 1,000,000 shares to Company employees.

The 2000 Stock Incentive Plan provides for the issuance of up to 6,552,000 shares for grant to eligible employees, consultants, and non-employee directors for a period of up to ten years at option prices not less than the fair market value at the time of grant. As of March 31, 2007, 456,000 shares were reserved and available to be granted pursuant to the 2000 Stock Incentive Plan. The 2006 Stock Incentive Plan was approved by shareholders on November 15, 2005, and provides for the issuance of up to 5,019,000 shares to be granted to eligible employees, consultants, and non-employee directors for a period of up to ten years at option prices not less than the fair market value at the time of grant. As of March 31, 2007, 3,843,000 shares were reserved and available to be granted pursuant to the 2006 Stock Incentive Plan. The Company may satisfy the awards upon exercise under both plans with either newly-issued or treasury shares.

The Company adopted FASB Statement No. 123 (Revised 2004)—”Share-Based Payment” (FASB No. 123(R)) on July 1, 2005 using the modified prospective method. Stock-based compensation expenses in the three-month and nine-month periods ended March 31, 2007 was $3,176,000 ($2,139,000 after tax, or $0.03 per share) and $9,269,000 ($6,262,000 after tax, or $0.08 per share), respectively. For the three-month period ended March 31, 2007 stock-based compensation expense was comprised of $2,951,000 attributable to stock options and $225,000 attributable to the employee stock purchase plan. For the nine-month period ended March 31, 2007 stock-based compensation expense was comprised of $8,664,000 attributable to stock options and $605,000 attributable to the employee stock purchase plan. As of March 31, 2007 and June 30, 2006 the total unrecognized stock-based compensation expenses related to non-vested stock awards was $22,777,000 and $21,335,000, respectively, which will be recognized over a weighted-average period of 1.96 and 1.75 years, respectively.

FASB No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as a component of financing cash flows instead of operating cash flows. For the nine-month periods ended March 31, 2007 and March 31, 2006, FASB 123 No. (R) resulted in cash flows provided by financing activities of $5,464,000 and $6,225,000, respectively, which reduced cash flows provided by operating activities by the same amount.

The following table summarizes the Company’s stock option information as of, and for the nine-month period ended March 31, 2007:


	Option Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value (1)		Weighted-Average Contractual Life Remaining in Years
Outstanding at June 30, 2006	5,757,000		$	26.17	$	9.39	7.54
Granted at fair value	1,475,000			35.42
Exercised	(784,000	)		18.78
Cancelled	(95,000	)		31.54

Outstanding at March 31, 2007	6,353,000		$	29.17	$	12.82	7.53

Exercisable at March 31, 2007	3,703,000		$	21.52	$	20.47	6.04

(1)	The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

The exercise period for all stock options may not exceed ten years from the date of grant. Stock options granted to employees become exercisable ratably over four years (25% per year) from the date of grant. Stock options granted to non-employee directors become exercisable over three years from the date of grant (25% after one year from the date of grant, an additional 25% after two years, and the remaining 50% after three years). The Company attributes stock-based compensation expense to the Consolidated Statement of Operations using the straight-line method over the applicable vesting periods.

The weighted-average grant date fair value of stock options granted during the nine-month periods ended March 31, 2007 and 2006 was $8.59 and $9.42 per share, respectively. The total intrinsic value of stock options exercised during the nine-month periods ended March 31, 2007 and 2006 was $16,167,000 and $17,632,000, respectively.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


	Nine-month periods ended March 31
	2007		2006
Weighted-average expected stock-price volatility	23.7	%	24.6	%
Weighted-average expected option life	3.4 years		3.5 years
Average risk-free interest rate	4.8	%	4.0	%
Average dividend yield	0.0	%	0.0	%

The average risk-free interest rate is based on the U.S. treasury security rate with a term to maturity that approximates the option’s expected life as of the grant date. Expected volatility is determined using both current and historical implied volatilities of the underlying stock which is obtained from public data sources. The expected life of the stock options is determined using historical data adjusted for the estimated exercise dates of unexercised options. Additionally, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

NOTE H – COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, were as follows:


	Three-Month Periods Ended					Nine-Month Periods Ended
	March 31 2007			March 31 2006		March 31 2007			March 31 2006
Net income	$	34,051,000		$	27,862,000	$	85,719,000		$	70,492,000
Foreign currency translation gains (losses)		1,338,000			1,366,000		5,359,000			(3,041,000	)
Unrealized losses on marketable securities		(5,000	)		—		(8,000	)		—

Comprehensive income	$	35,384,000		$	29,228,000	$	91,070,000		$	67,451,000

NOTE I – RESTRUCTURING AND ACQUISITION-RELATED EXPENSES

The Company incurred the following restructuring and acquisition-related expenses:


	Three-month periods ended				Nine-month periods ended
	March 31 2007		March 31 2006		March 31 2007		March 31 2006
Galway, Ireland facility charges	$	174,000	$	—	$	2,025,000	$	—
Wallingford, Connecticut facility charges		—		—		—		94,000
Acquisition-related integration expenses and other costs		803,000		407,000		1,839,000		1,626,000

TOTAL	$	977,000	$	407,000	$	3,864,000	$	1,720,000

Galway, Ireland Manufacturing Facility—On May 11, 2006, the Company announced that it would be closing its Galway, Ireland manufacturing facility. The facility ceased operations on October 31, 2006, and substantially all of the accrued obligations have been paid as of March 31, 2007.

The manufacturing activities previously conducted at the Galway facility were transferred to three of the Company’s existing manufacturing sites in the U.S. It is anticipated that the closure will result in future cost reductions and operational efficiencies. Approximately 40 employees, primarily from manufacturing and manufacturing support, purchasing and certain administrative support functions, were involuntarily terminated as a result of the closure. The costs reflected in the table above for Galway, Ireland facility charges relate primarily to employee retention and transition benefits as well as other direct costs associated with the facility closure.

Acquisition-Related Integration Expenses—As more fully described in Note J to these consolidated financial statements, the Company has recently completed several business acquisitions. In certain cases, the Company’s acquisition integration strategy includes the centralization and harmonization of business processes which may result in the elimination of redundancies, centralization of corporate services functions, and the implementation of standardized processes across several business functions, which may include, among others, information systems, manufacturing, quality systems, and marketing. Additionally, the Company periodically makes one-time compensation related payments in order to retain personnel to assist with the acquisition and related integration activities. These costs, collectively referred to as acquisition-related integration expenses, are incremental, non-recurring costs directly related to business acquisitions that are expensed as incurred in the Consolidated Statement of Operations.

NOTE J – ACQUISITIONS

OxyTec—On April 21, 2006, the Company purchased 100% of the outstanding stock of OxyTec Medical Corporation (OxyTec) for a cash purchase price of $10,420,000 (including transaction costs), with provisions for up to $30,000,000 of additional payments to be made based on the acquired company’s operating performance in future years. These additional future payments would be recorded as costs of the acquisition at the time they become payable. OxyTec, located in Anaheim Hills, California, developed an innovative portable oxygen concentrator that has the potential to provide ambulatory oxygen patients greater freedom to be mobile while reducing homecare providers’ costs associated with the delivery of oxygen to these patients. The results of operations of OxyTec are included in the Company’s Consolidated Statement of Operations beginning on the acquisition date, April 21, 2006. The acquisition did not materially impact the Company’s net sales or net income during the three-month and nine-month periods ended March 31, 2007.

Omni Therm—On May 15, 2006, the Company purchased certain assets and liabilities of Omni Therm, Inc. (Omni Therm) for a cash purchase price of $2,625,000 (including transaction costs). Omni Therm, located in St. Louis, Missouri, is an original equipment manufacturer, supplier, and wholesaler of infant heel warmers, infant warming mattresses, and hospital thermometer products. Prior to the acquisition, Omni Therm was the Company’s supplier of these products through Children’s Medical Ventures. The results of operations of Omni Therm are included in the Company’s Consolidated Statement of Operations beginning on the acquisition date, May 15, 2006. The acquisition did not materially impact the Company’s net sales or net income during the three-month and nine-month periods ended March 31, 2007.

Mayo—On January 2, 2007, Respironics acquired the home care assets of its Australian distributor, Mayo Healthcare Group Pty Ltd. (Mayo). The acquisition provides the Company with a direct presence in the Australian sleep therapy, home non-invasive ventilation, and oxygen markets. The cash purchase price totaled approximately $6,230,000 (including transaction costs) with provisions for additional payments to be made based on operating performance through 2009. The acquired entity’s results of operations are included in the Company’s Consolidated Statement of Operations beginning on the acquisition date, January 2, 2007. The acquisition did not materially impact the Company’s net sales or net income during the three-month and nine-month periods ended March 31, 2007.

Other—On October 6, 2005, Respironics acquired an oxygen generation technology company. The acquired technology has the potential to be used as a basis for a cost effective oxygen generation device. The cash purchase price totaled $8,416,000 (including transaction costs), with provisions for uncapped additional payments to be made based on the acquired company’s future operating performance over a five year period commencing on the first commercial product sale date. These additional future payments would be recorded as costs of the acquisition at the time they become payable. The acquired entity’s results of operations are included in the Company’s Consolidated Statement of Operations beginning on the acquisition date, October 6, 2005. The acquisition did not materially impact the Company’s net sales or net income during the three-month and nine-month periods ended March 31, 2007.

In July 2006, the Company acquired a controlling interest in an international distributor as well as certain sleep disorder technology for total consideration of $3,558,000, net of cash acquired. Neither the acquisition of the international distributor nor the acquisition of the sleep disorder technology had a material impact on the Company’s net sales or net income during the three-month and nine-month periods ended March 31, 2007.

NOTE K – SALE OF INVESTMENT

On July 21, 2005, Centene Corporation (Centene) acquired AirLogix, Inc. (AirLogix) for approximately $35,000,000 in cash plus additional consideration of up to $5,000,000 based on the achievement of certain performance milestones. At the time of the sale, the Company held approximately 17% ownership in AirLogix.

In connection with the sale of AirLogix, the Company received total proceeds of $6,416,000; $5,488,000 in the three-month period ended September 30, 2005, and upon the conclusion of the earn-out period, $928,000 in the three-month period ended December 31, 2006. The Company recorded pre-tax gains totaling $5,326,000; $4,398,000 in the three-month period ended September 30, 2005 and $928,000 in the three-month period ended December 31, 2006. These gains are included in the Consolidated Statement of Operations in Other income in the periods described above. The Company does not expect to receive any additional future proceeds related to this stock sale.

NOTE L – RECENT ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” (FASB No. 156). FASB No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. FASB No. 156 also allows an entity to choose either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. FASB No. 156 is effective after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company will adopt FASB No. 156 as of July 1, 2007, and does not believe it will have a material impact to its consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 creates a single model to address uncertainty in income tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 scopes income taxes out of FASB Statement No. 5, “Accounting for Contingencies.” FIN 48 is effective for an entity’s fiscal year beginning after December 15, 2006. The Company will adopt FIN 48 as of July 1, 2007, as required, and is currently evaluating the impact of such adoption on its financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FASB No. 157). FASB No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. FASB No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt the provisions of FASB No. 157 on July 1, 2008, and does not believe it will have a material impact to its consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FASB No. 159”). This Standard allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. FASB No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company will be required to adopt the provisions of FASB No. 157 on July 1, 2008, and is currently evaluating the impact of such adoption on its financial statements.

NOTE M – SUBSEQUENT EVENTS – ACQUISITIONS

Emerson— On April 3, 2007, Respironics acquired the operating assets of J.H. Emerson Company (Emerson). Emerson is involved primarily in the manufacture and distribution of the CoughAssist® device that Respironics had previously distributed. The CoughAssist® device provides secretion clearance to patients with Chronic Obstructive Pulmonary Disease as well as certain other respiratory ailments and conditions. The base cash purchase price totaled approximately $23,000,000.

Other — On April 2, 2007, the Company also acquired a majority interest in an international distributor that provides it with a direct distribution channel in Denmark.

* * * * * * * * * *

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES REFORM ACT OF 1995.

The statements contained in this Quarterly Report on Form 10-Q, including those contained in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, along with statements in other sections of this document and other reports filed with the Securities and Exchange Commission (SEC), external documents and oral presentations, which are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities and Exchange Act of 1934, as amended. These forward-looking statements represent the Company’s present expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from the expected results included in the forward-looking statements. Those factors include, but are not limited to, the following: developments in the

healthcare industry; the success of the Company’s marketing, sales, and promotion programs; future sales, acceptance, and quality of the Company’s products and programs; the results of clinical trials; the timing and success of new product introductions; new product development; anticipated cost savings; FDA and other regulatory requirements, enforcement actions, product recalls or related field actions; future results from acquisitions and strategic investments; growth rates in foreign markets; regulations and other factors affecting operations and sales outside the United States; foreign currency fluctuations; the effects of a major natural disaster, cyber-attack or other catastrophic event that results in the destruction or disruption of any critical business or information technology systems; customer consolidation and concentration; increasing price competition and other competitive factors in the manufacture, distribution, and sale of products; interest rate fluctuations; expiration of intellectual property rights; intellectual property and related litigation; other litigation; future levels of earnings and revenues; the number of equity awards granted to employees and changes in the Company’s stock price; and third party reimbursement; all of which are subject to change.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS


	Three-month periods ended March 31						Percent Increase (Decrease)		Nine-month periods ended March 31						Percent Increase (Decrease)
	2007			2006			Percent Increase (Decrease)		2007			2006			Percent Increase (Decrease)
Net sales	$	307,389,896		$	267,311,633		15	%	$	862,677,316		$	765,435,362		13	%
Cost of goods sold		142,961,893			120,598,536		19	%		401,745,431			343,310,822		17	%

		164,428,003			146,713,097		12	%		460,931,885			422,124,540		9	%
General and administrative expenses (excluding acquisition earn-out expenses)		43,761,620			37,413,924		17	%		117,071,681			117,221,726		0	%
Acquisition earn-out expenses		—			665,193					—			2,717,722
Sales, marketing and commission expenses		58,729,219			50,725,674		16	%		171,158,243			151,918,671		13	%
Research and development expenses		16,792,630			14,106,931		19	%		47,044,891			41,138,760		14	%
Contribution to foundation		2,500,000			—					2,500,000			1,500,000
Restructuring and acquisition-related expenses		977,426			406,741					3,864,336			1,719,907
Other income		(3,104,325	)		(1,192,908	)				(7,944,256	)		(7,206,812	)

		119,656,570			102,125,555					333,694,895			309,009,974

INCOME BEFORE INCOME TAXES		44,771,433			44,587,542		0	%		127,236,990			113,114,566		12	%
Income taxes		10,720,750			16,725,139		(36	%)		41,518,201			42,622,974		(3	%)

NET INCOME	$	34,050,683		$	27,862,403		22	%	$	85,718,789		$	70,491,592		22	%

Diluted earnings per share	$	0.46		$	0.38		21	%	$	1.16		$	0.96		21	%

Diluted shares outstanding		74,302,114			73,704,576					73,960,109			73,536,761

Net Sales—Net sales for the three-month period ended March 31, 2007 were $307,390,000, representing a 15% increase over the net sales of $267,312,000 recorded for the three-month period ended March 31, 2006. The Company’s sales growth during this three-month period is summarized as follows:


	Three-month periods ended March 31								Dollar Increase		Percent Increase
	2007				2006				Dollar Increase		Percent Increase
Domestic Sleep and Home Respiratory Products	$	150,813,000	49	%	$	135,643,000	51	%	$	15,170,000	11	%
Domestic Hospital Products		56,122,000	18	%		49,337,000	18	%		6,785,000	14	%
International Products		100,455,000	33	%		82,332,000	31	%		18,123,000	22	%

Total	$	307,390,000	100	%	$	267,312,000	100	%	$	40,078,000	15	%

Net sales for the nine-month period ended March 31, 2007 were $862,677,000, representing an 13% increase over the net sales of $765,435,000 recorded for the nine-month period ended March 31, 2006. The Company’s sales growth during this nine-month period is summarized as follows:


	Nine-month periods ended March 31								Dollar Increase		Percent Increase
	2007				2006				Dollar Increase		Percent Increase
Domestic Sleep and Home Respiratory Products	$	427,623,000	50	%	$	386,899,000	51	%	$	40,724,000	11	%
Domestic Hospital Products		154,069,000	18	%		140,978,000	18	%		13,091,000	9	%
International Products		280,985,000	32	%		237,558,000	31	%		43,427,000	18	%

Total	$	862,677,000	100	%	$	765,435,000	100	%	$	97,242,000	13	%

The Company’s strategy is to broaden the scope of its business in the sleep and respiratory markets while continuing to grow its core drivers. The Company’s core growth drivers include expanding its presence in the global Obstructive Sleep Apnea (OSA) marketplace, furthering the acceptance and adoption of the Company’s ventilation therapies, and continued successful international expansion. In connection with this strategy, the Company also continues to invest and gain critical mass in Children’s Medical Ventures, Home Respiratory Care, Respiratory Drug Delivery and Sleep Well Ventures.

Overall, acquired revenues and the impact of foreign currency exchange rate changes, in the aggregate, had a 1% positive impact on revenues during the three-month period ended March 31, 2007, and less than 1% during the nine-month period ended March 31, 2007.

The Company’s domestic Sleep and Home Respiratory revenue increases during the three-month and nine-month periods ended March 31, 2007 were led by a year-over-year increase of $18,820,000 (18%) and $46,528,000 (15%) in sleep therapy, respectively. The Company’s growth in sleep therapy was achieved through the Company’s overall product breadth, strong sales channels with thought leaders and homecare providers, and growth of the domestic OSA therapy market (estimated to be approximately 15% – 20%). During the three-month period ended March 31, 2007, the Company was able to provide its customers with a full range of the M Series sleep therapy devices with C-Flex^TM and OptiLife^TM, a nasal pillow mask that was introduced during the period. Partially offsetting these increases, the Company experienced declines in sales of home respiratory care products in the three and nine-month periods ended March 31, 2007 of $1,818,000 (9%) and $5,987,000 (11%), respectively, primarily due to uncertainty surrounding the impact of medical reimbursement changes as well as supply shortages of the CoughAssist^® device prior to the Company’s acquisition of J.H. Emerson Company that is more fully described in Note I to the consolidated financial statements.

Sales of domestic Hospital products during the three-month and nine-month periods ended March 31, 2007 increased by $6,785,000 (14%) and $13,091,000 (9%), respectively. Sales of domestic Critical Care products (consisting of ventilation therapy and cardio-respiratory monitoring products) increased by $5,238,000 (21%) and $12,889,000 (18%) during the three-month and nine-month periods ended March 31, 2007, respectively. These results were led by increased ventilation sales, specifically the Vision^{^®} non-invasive ventilator, as well as growth in monitoring sales. Revenues from domestic Respiratory Drug Delivery products (consisting of traditional asthma and nebulizer products as well as advanced respiratory drug delivery systems) increased by $559,000 (5%) during the three-month period ended March 31, 2007, and decreased by $1,872,000 (7%) during the nine-month period ended March 31, 2007. The year-to-date decrease was largely due to the initial stocking orders included in sales for the prior year, associated with the prior year launch of the Company’s I-neb^TMAdaptive Aerosol Delivery™ system. Domestic Children’s Medical Ventures product revenues (consisting of infant monitors, bilirubin devices, and developmental care products) increased by $988,000 (7%) and $2,074,000 (5%), during the three-month and nine-month periods ended March 31, 2007.

The Company’s international growth during the three-month and nine-month periods ended March 31, 2007 included increased sales of both Sleep and Home Respiratory and Hospital products. The most significant increase was driven by sleep therapy, which increased by $11,029,000 (31%) and $28,499,000 (28%) during the three-month and nine-month periods ended March 31, 2007, respectively. International Hospital product sales increased by $5,877,000 (25%) and $17,282,000 (26%) for the three-month and nine-month periods ended March 31, 2007. The Company’s international revenue growth occurred across key markets, especially Europe and the Far East / Asia Pacific.

Gross Profit—The Company’s gross profit was 53% of net sales for the three-month and nine-month periods ended March 31, 2007, as compared to 55% of net sales for the three-month and nine-month periods ended March 31, 2006. Gross profit percentage decreased in the first half of the current year versus the prior year as the Company conducted its planned transition

to the new M Series platform of sleep therapy devices. During this transition the Company continued to aggressively sell its legacy CPAP platform, sometimes at discounted prices, and had not yet reached peak manufacturing efficiency on the new M Series. During the three-month period ended March 31, 2007, the Company experienced higher freight costs versus the prior year. The margin pressure from the CPAP platform transition and higher freight costs was partially offset by higher revenue, product sales mix and material cost reductions achieved through the Company’s successful negotiations with suppliers and product design changes.

General and Administrative Expenses (excluding acquisition earn-out expenses)—General and administrative expenses were $43,762,000 (14% of net sales) for the three-month period ended March 31, 2007, compared to $37,414,000 (14% of net sales) for the three-month period ended March 31, 2006. For the nine-month period ended March 31, 2007, general and administrative expenses were $117,072,000 (14% of net sales) compared to $117,222,000 (15% of net sales) for the prior year nine-month period. The increase for the three-month period ended March 31, 2007 was due primarily to increased variable compensation expense and additional warranty expense due to higher than previously estimated third party costs to administer the previously announced recall of a heated humidifier device used with the Company’s older legacy CPAP systems. General and administrative expenses were essentially flat for the nine-month period ended March 31, 2007. General and administrative expense for the nine-month period ended March 31, 2007 includes $3,872,000 of product warranty expense associated with the recall.

Acquisition Earn-out Expenses—During the three-month and nine-month periods ended March 31, 2006, the Company incurred acquisition earn-out expenses of $665,000 and $2,718,000 (less than 1% of net sales in both periods), related to the Company’s May 2002 acquisition of Fuji. The earn-out measurement period ceased during the quarter ended June 30, 2006; as such, no expense was recorded during the three-month or nine-month periods ended March 31, 2007.

Sales, Marketing and Commission Expenses—Sales, marketing and commission expenses were $58,729,000 (19% of net sales) for the three-month period ended March 31, 2007, compared to $50,726,000 (19% of net sales) for the three-month period ended March 31, 2006. For the nine-month period ended March 31, 2007, sales, marketing and commission expenses were $171,158,000 (20% of net sales) compared to $151,919,000 (20% of net sales) for the prior year nine-month period. The increase was driven by the Company’s continued investments in sales and marketing programs and sales force, especially in international markets, increased marketing costs associated with the launch of new products, including the M Series platform of sleep therapy devices and the OptiLife™ nasal pillows mask, as well expenses at acquired companies.

Research and Development Expenses—Research and development expenses were $16,793,000 (5% of net sales) for the three-month period ended March 31, 2007, compared to $14,107,000 (5% of net sales) for the three-month period ended March 31, 2006. For the nine-month period ended March 31, 2007, research and development expenses were $47,045,000 (5% of net sales) compared to $41,139,000 (5% of net sales) for the prior year nine-month period. The dollar increase was due to the Company’s continuing commitment to research, development and new product introductions, as well as research and development activities at recently acquired companies. Significant product development efforts are ongoing and new products in many of the Company’s major product lines have recently been launched, including all models of the M Series platform of sleep therapy devices, the new OptiLife^TM nasal pillows mask, the BiPAP^® autoSV^™ device designed for complicated sleep-disordered breathing patients, the A-Flex^™ breathing mode integrated into the REMstar^® Auto CPAP device, the EverFlo^™ stationary oxygen concentrator, and the EverGo^™ portable oxygen concentrator. Additionally, new product launches are scheduled over the remainder of the current fiscal year and beyond. Additional development work and clinical trials are being conducted in certain product areas within the sleep and respiratory markets outside the Company’s current core products and patient groups.

Contribution to Foundation—During the three-month and nine-month periods ended March 31, 2007, the Company contributed $2,500,000 and 2,500,000, respectively, to the Respironics Sleep and Respiratory Research Foundation (the “Foundation”). The Company contributed zero and $1,500,000 to the foundation during the three-month and nine-month periods ended March 31, 2006, respectively. The Foundation was formed for scientific, educational, and charitable purposes and is used to promote awareness of, and research into, the medical consequences of sleep and respiratory problems.

Restructuring and Acquisition-Related Expenses—During the three-month and nine-month periods ended March 31, 2007, the Company incurred restructuring and acquisition-related expenses of $977,000 and $3,864,000, related primarily to the closure of its Galway, Ireland manufacturing facility, the integration of acquired companies, and other costs. During the three-month and nine-month periods ended March 31, 2006, the Company incurred restructuring and acquisition-related expenses of $407,000 and $1,720,000 related primarily to the integration of acquired companies and other costs. See Note I to the consolidated financial statements for additional information regarding restructuring and acquisition-related expenses.

Other Income—Other income was $3,104,000 for the three-month period ended March 31, 2007, compared to $1,193,000 for the three-month period ended March 31, 2006. Other income was $7,944,000 for the nine-month period ended March 31, 2007, compared to $7,207,000 for the nine-month period ended March 31, 2006. Other income in all periods presented includes net interest income and realized and unrealized foreign currency exchange gains (losses), partially offset by recognized gains (losses) on designated cash flow hedges that are more fully described in Note E to the consolidated financial statements. Other income in the nine-month period ended March 31, 2007 includes a $928,000 gain related to the AirLogix sale described in Note K. This cash receipt represents the final payment related to this transaction. Other income in the nine-month period ended March 31, 2006 includes a one-time gain of $4,398,000 from the sale of a minority equity investment in AirLogix that is more fully described in Note K to the consolidated financial statements.

Income Taxes—The Company’s effective income tax rate was approximately 24% for the three-month period ended March 31, 2007 and 33% for the nine-month period ended March 31, 2007. The Company’s effective income tax rate was approximately 38% for the three-month and nine-month periods ended March 31, 2006. The lower rate in the current period was primarily driven by the favorable resolution of certain tax matters related to a prior year transaction, which were previously accrued for in the consolidated balance sheet.

Net Income—As a result of the factors described above, the Company’s net income was $34,051,000 (11% of net sales) or $0.46 per diluted share for the three-month period ended March 31, 2007, compared to net income of $27,862,000 (10% of net sales) or $0.38 per diluted share for the three-month period ended March 31, 2006. The Company’s net income was $85,719,000 (10% of net sales) or $1.16 per diluted share for the nine-month period ended March 31, 2007, compared to net income of $70,492,000 (9% of net sales) or $0.96 per diluted share for the nine-month period ended March 31, 2006. For the three-month periods ended March 31, 2007 and 2006, stock-based compensation under FASB No. 123(R) was $3,176,000 on a pre-tax basis, or $0.03 per diluted share after tax and $3,092,000 on a pre-tax basis, or $0.03 per diluted share after tax, respectively. For the nine-month periods ended March 31, 2007 and 2006, stock-based compensation under FASB No. 123(R) was $9,269,000 on a pre-tax basis, or $0.08 per diluted share after tax and $8,971,000 on a pre-tax basis, or $0.09 per diluted share after tax, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital of $531,716,000 at March 31, 2007 and $431,050,000 at June 30, 2006. Net cash provided by operating activities for the nine-month period ended March 31, 2007 was $95,581,000, compared to $59,935,000 for the nine-month period ended March 31, 2006. The increase in cash provided by operating activities was primarily due to higher net income before depreciation and amortization, and overall positive working capital changes despite larger increases in inventories. The increase in inventories that affected operating cash flows was necessary to support the Company’s new product portfolio, including the M Series platform of sleep therapy devices and other new products, as well as facility changes. Cash flows from operating activities in the current year reflect a payment of $5,365,000 related to the final amount owed under the earn-out provisions of the Fuji acquisition. FASB No. 123(R) requires the excess tax benefits from stock option exercises to be reported as a reduction to operating cash flows, with an offsetting increase to cash flows from financing activities. For the nine-month periods ended March 31, 2007 and 2006 this reduction to operating cash flows totaled $5,464,000 and $6,225,000, respectively. As of March 31, 2007 and 2006, the Company recognized gains of $928,000 and $4,398,000, respectively, on the sale of the AirLogix investment that is subtracted from operating cash flows.

Net cash used by investing activities was $112,370,000 and $53,313,000 for the nine-month periods ended March 31, 2007 and 2006, respectively. For the nine-month period ended March 31, 2007, cash flows used in investing activities include the purchase of $59,168,000 of short-term investments, net of $16,634,000 of proceeds from the sales and maturities of short-term investments. During the nine months ended March 31, 2007 and 2006, respectively, the Company paid $19,827,000 and $21,621,000 (net of cash acquired) to acquire businesses, intangible assets, and other investments, including additional purchase price payments for previously acquired businesses. These acquisition-related payments are more fully described in Note J to the consolidated financial statements. The remaining cash used by investing activities for both periods represented capital expenditures ($50,938,000 and $37,180,000 during the nine-month periods ended March 31, 2007 and 2006, respectively), including the purchase of leasehold improvements, production equipment, computer hardware and software, telecommunications and office equipment, and the production of equipment leased to customers. Specifically in the current year, the Company invested in several growth support initiatives, including various facility expansions and production equipment for new products. During the nine-month periods ended March 31, 2007 and 2006, the Company received $928,000 and $5,488,000, respectively, of proceeds from the sale of its minority equity investment in AirLogix. Funding for investing activities in both periods was provided by positive cash flow from operating activities and accumulated cash and cash equivalents.

Net cash provided by financing activities of $27,302,000 during the nine-month period ended March 31, 2007 consists of $18,064,000 of proceeds from the issuance of common stock under the Company’s stock option plans, $2,182,000 of proceeds from short-term borrowings and equipment financing at the Company’s Fuji subsidiary (net of amounts paid under long-term debt and capital lease obligations), $5,464,000 of excess tax benefits from stock option exercises, and $1,592,000 of proceeds related to the guarantee of third party debt. Net cash provided by financing activities of $23,943,000 during the nine-month period ended March 31, 2006 consists of $17,152,000 of proceeds from the issuance of common stock under the Company’s stock option plans, $566,000 of proceeds from short-term borrowings and equipment financing at the Company’s Fuji subsidiary (net of amounts paid under long-term debt and capital lease obligations), and $6,225,000 of excess tax benefits from stock option exercises.

The Company believes that its sources of funding—consisting of projected positive cash flow from operating activities, the availability of additional funds under its revolving credit facility (totaling approximately $148,246,000 at March 31, 2007,

with certain provisions allowing for further expansion of the credit facility), and its accumulated cash, cash equivalents, and short-term investments—will be sufficient to meet its current and presently anticipated short-term and long-term needs for operating activities, investing activities, and financing activities (primarily consisting of scheduled payments on long-term debt).

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has contractual financial obligations and commercial financial commitments consisting primarily of long-term debt, capital lease obligations, non-cancelable operating leases, and amounts payable to selling parties of previously acquired businesses.

In the current year, the Company made the final purchase payment, totaling $6,798,000, to the former owner of Fuji. Prior to the final payment, obligations pertaining to the Fuji acquisition were included with accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheet. Additionally, in the current year, the Company guaranteed the payment of certain third-party bank debt. The fair value of this obligation is included in the Contractual Obligations and Commercial Commitments table below. Other than the payment of the Fuji purchase obligation, and the third party debt guarantee, the composition and nature of the Company’s obligations and commitments have not changed materially since June 30, 2006.

On August 19, 2002 and as subsequently amended, the Company entered into a revolving credit agreement with a group of banks under which a total of $150,000,000 is available through August 31, 2009. The revolving credit agreement is unsecured and contains certain financial covenants with which the Company must comply. The Company is currently in compliance with these covenants. The interest rate on the revolving credit facility is based on a margin over the London Interbank Offered Rate (LIBOR). As of March 31, 2007, no borrowings were outstanding under the revolving credit agreement.

The following table summarizes significant contractual obligations and commercial commitments of the Company as of March 31, 2007:

Contractual Obligations and Commercial Commitments


	Total		Up to 1 Year		Payments Due by Period				Over 5 Years
Contractual Obligations	Total		Up to 1 Year		1-3 Years		3-5 Years		Over 5 Years
Long-term debt	$	1,190,000	$	944,000	$	246,000	$	—	$	—
Capital lease obligations		45,661,000		19,016,000		21,097,000		5,548,000		—
Operating leases		44,187,000		9,626,000		14,900,000		11,545,000		8,116,000
Amounts payable to selling parties of previously acquired businesses		7,436,000		1,699,000		2,124,000		3,613,000		—

Total contractual obligations	$	98,474,000	$	31,285,000	$	38,367,000	$	20,706,000	$	8,116,000


Other Commercial Commitments	Total Amounts Committed		Amount of Commitment Expiration Per Period
Other Commercial Commitments	Total Amounts Committed		Up to 1 Year		1-3 Years		3-5 Years		Over 5 Years
Letters of credit	$	1,754,000	$	1,754,000	$	—	$	—	$	—
Third party bank debt guarantee		1,563,000		117,000		299,000		1,147,000		—

The amounts reflected in the contractual obligations and commercial commitments table above include the future payments that are accrued as of March 31, 2007 in accordance with the earn-out provisions and the Company’s other fixed obligations under the acquisition agreements. In addition to the amounts payable to the selling parties of previously acquired businesses that are set forth in the contractual obligations and commercial commitments table above, the Company may be obligated to make additional future payments under earn-out provisions pertaining to the acquisitions of the acquired oxygen generation technology company, OxyTec, and Mayo for which the total amount of the obligations will not be known until the occurrence of future events. See Note J to the Consolidated Financial Statements for additional information about these obligations.

The contractual obligations and commercial commitments table above does not reflect obligations under purchase orders that arise in the ordinary course of business and that are typically fulfilled within 90 days. In addition to ordinary course purchase orders, the Company enters into supply agreements and distribution agreements in the ordinary course of business, some of which make the purchase of minimum quantities of products a condition to exclusivity or to obtaining or retaining more

favorable pricing. Since failure to purchase the minimum amounts under these agreements generally does not result in a breach of contract, but only to an option on the part of the vendor to terminate the Company’s exclusivity or increase the product prices the Company pays to the vendor, they are not included in the Contractual Obligations and Commercial Commitments table above.

In connection with customer leasing programs, the Company uses independent leasing companies for the purpose of providing financing to certain customers for the purchase of the Company’s products. In some cases, the Company is contingently liable, in the event of a customer default, to the leasing companies within certain limits for unpaid installment receivables initiated by or transferred to the leasing companies. The transfer of certain of these installment receivables meets the criteria of FASB No. 140 and therefore is not recorded on the Company’s financial statements.

The Company has guaranteed the payment of certain third-party bank debt. The maximum potential amount of future payments that the Company could be required to make, in the event that the third party defaults on its debt obligations, is $7,000,000. The term of the guarantee is five years from its March 2006 inception date. The current fair value of the guarantee approximates $1,563,000; this amount is included in the consolidated balance sheet within other non-current liabilities and will be amortized into income over five years. At the present time, the Company does not believe it is probable that the third party will default on the amount subject to the guarantee.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates and assumptions that may affect the reported financial condition and results of operations should actual results, differ. The Company bases its estimates and assumptions on the best available information and believes them to be reasonable under the circumstances. There has been no change in the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

The Company is exposed to market risk from changes in foreign currency exchange rates.

Foreign Currency Exchange Rates—The Company’s reporting currency is the U.S. Dollar, and a substantial majority of the Company’s sales, expenses and cash flows are transacted in U.S. Dollars. The Company also conducts business in various foreign currencies, primarily the Japanese Yen, the Euro, the British Pound, the Canadian Dollar, the Swiss Franc, the Hong Kong Dollar, the Swedish Kronor, the Norwegian Kroner, the Australian Dollar and the Chinese Yuan. As part of the Company’s risk management strategy, the Company has put in place a hedging program under which the Company enters into foreign currency option and forward contracts to hedge a portion of cash flows denominated in certain foreign currencies. These contracts are entered into to reduce the risk that the Company’s earnings and cash flows, resulting from certain forecasted and recognized currency transactions, will be affected by changes in foreign currency exchange rates. See Note E to the Consolidated Financial Statements for additional information about the Company’s foreign currency hedging activities.

For the nine-month period ended March 31, 2007, sales denominated in currencies other than the U.S. Dollar totaled $157,490,000, or approximately 18% of net sales. An adverse change of 10% in exchange rates would have resulted in a decrease in sales of $14,317,000 for the nine-month period ended March 31, 2007. The Company uses a combination of natural foreign currency hedges (foreign currency-denominated costs that partially offset these revenues) and acquired hedge contracts to mitigate the impact that an adverse change of 10% in exchange rates would have on its net income. Foreign currency gains included in the determination of the Company’s net income, including the impact of designated cash flow hedges, totaled $531,000 for the nine-month period ended March 31, 2007.

Interest Rates—Interest rates have not had a significant effect on the Company’s business during the periods discussed. All of the Company’s long-term obligations are subject to fixed interest rates, and the Company has no interest rate hedging agreements.

Inflation—Inflation has not had a significant effect on the Company’s business during the periods discussed.

Item 4.

Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this quarterly report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting during the three-month period ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1: Legal Proceedings.

The Company is, as a normal part of its business operations, a party to other legal proceedings in addition to those previously described in filings of the Company. Legal counsel has been retained for each proceeding, and none of these proceedings is expected to have a material adverse impact on the Company’s results of operations, financial condition, or cash flows.

Item 1A: Risk Factors.

There were no material changes in the Company’s risk factors from the risks disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

(a)	Not applicable

(b)	Not applicable

(c)	Not applicable

Item 3: Defaults Upon Senior Securities.

(a)	Not applicable

(b)	Not applicable

Item 4: Submission of Matters to a Vote of Security Holders.

(a)	Not applicable

(b)	Not applicable

(c)	Not applicable

(d)	Not applicable

Item 5: Other Information.

(a)	Not applicable

(b)	Not applicable

Item 6: Exhibits.


Exhibit 15		Acknowledgement of Ernst & Young, LLP

Exhibit 31.1		Section 302 Certification of John L. Miclot, President and Chief Executive Officer.

Exhibit 31.2		Section 302 Certification of Daniel J. Bevevino, Vice President and Chief Financial Officer.

Exhibit 32		Section 906 Certifications of John L. Miclot, President and Chief Executive Officer and Daniel J. Bevevino, Vice President and Chief Financial Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		RESPIRONICS, INC.

Date: May 10, 2007		/s/ DANIEL J. BEVEVINO
		Daniel J. Bevevino Vice President, and Chief Financial and Principal Accounting Officer

		Signing on behalf of the registrant and as Chief Financial and Principal Accounting Officer